Europe: Re­born from its own ashes?

Financial Mirror (Cyprus) - - FRONT PAGE - By Louis Gave

Over the past decade, global in­vestors would have been wise to largely ig­nore eu­ro­zone equities. Their un­der­per­for­mance has not been con­stant, but in­ter­mit­tent pol­icy-driven ral­lies have be­come weaker and shal­lower. Eu­ro­zone stocks out­per­formed for two years after Mario Draghi’s 2012 prom­ise to do “what­ever it takes” to save the euro, yet by the time the Euro­pean Cen­tral Bank got around to launch­ing its as­set-buy­ing pro­gram in 2015 the ben­e­fit quickly faded—within a few months eu­ro­zone equities were back to lag­ging their peers on a scale seen in the 2011-12 cri­sis (see chart be­low). This ob­ser­va­tion is rel­e­vant to fears about the mar­ket fallout from the Brexit vote as most in­vestors were wor­ried not so much about its im­pact on Bri­tain (which rep­re­sents less than 3% of global GDP), but whether a Brexit will mark the be­gin­ning of the end for a hob­bling Euro­pean Union?

In re­cent weeks, fi­nan­cial mar­kets have been at their most my­opic, sell­ing off on ev­ery poll favour­ing a Brexit and ral­ly­ing on each widen­ing in the book­mak­ers’ odds for a Leave vote. Such be­hav­iour would sug­gest that the threat to the EU is one-di­men­sional, which is clearly not the case. After all, Beppe Grillo’s Five Star move­ment just won mu­nic­i­pal elec­tions in Rome and Turin on the back of antieuro sen­ti­ment. In Spain, Pode­mos, a party that did not ex­ist a decade ago has emerged as a back­lash against Brus­sels’ dik­tat. In a sim­i­lar vein the Al­ter­na­tive for Ger­many party has mor­phed from be­ing an anti-euro force to a squarely an­ti­im­mi­grant party, while in France, no-one doubts that Ma­rine Le Pen’s Na­tional Front will be in the sec­ond round of next year’s pres­i­den­tial elec­tion — the only ques­tion be­ing, who will stand against her?

The re­al­ity, of course, is that two decades of “one-size fits all” poli­cies, have not de­liv­ered Euro­pean vot­ers the shin­ing to­mor­rows they were promised 20 years ago; hence, a grow­ing mi­nor­ity of them feel duped. The ques­tion that in­vestors must con­front is whether this mi­nor­ity turns into a ma­jor­ity in the near fu­ture, not only in Bri­tain, but in coun­tries around Europe.At some point, a move­ment such as Pode­mos in Spain or Five Star in Italy does suf­fi­ciently en­er­gise vot­ers to re­ject the EU and these po­lit­i­cal par­ties will not be bul­lied or bought off like Syriza was in Greece.

What will be the likely fi­nan­cial mar­ket re­sponse after the Brexit vote? A panic for a week or two is probable as the de­ci­sion will be treated as the death-knell for a poorly func­tion­ing EU. But, on the flip side, and as Charles Gave of­ten likes to say, was it bad news when the Soviet Union im­ploded? When some­thing doesn’t work (and ten years of con­stant Euro­pean eq­uity un­der­per­for­mance, high un­em­ploy­ment rates, and dis­sat­is­fac­tion among vot­ers shows that some­thing isn’t quite right), why keep go­ing down the same path, pre­tend­ing that all is well?

Had a Brexit been re­jected, then Europe in the short term would at least have been likely to me­an­der along and in­vestors would then be free to fret about the rise of Pode­mos (which is wor­ry­ing), or the as­cent of the Na­tional Front (even more wor­ry­ing), or the rise of the AfD.

In essence, the ques­tion that will be an­swered in the com­ing days is whether Europe, like a phoenix, is given the op­tion of be­ing re­born from its own ashes, or if Europe, fol­low­ing a brief up­turn in as­set mar­kets, re­turns to its trend of slowly slip­ping into ir­rel­e­vance for most global in­vestors.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.